Dynamic Portfolio Decisions with Climate Risk and Model Uncertainty

  • Alexey Rubtsov, Ph.D, Ryerson University, Global Risk Institute
  • Sally Shen, Research Associate, Global Risk Institute
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ABOUT THIS PAPER:

Failure to act on climate change ranked No. 1 on the list of top ten global risks by severity over the next ten years according to the World Economic Forum’s annual Global Risks Report. It has become well understood that the impact of climate change on financial markets is highly uncertain and that our society is only learning about it over time. Notwithstanding existing research, little is known about the time horizon effects of climate uncertainty on optimal portfolio decisions, where climate uncertainty is defined as uncertainty about probabilities of future climate trajectories. This paper fills the gap and studies the impact of climate uncertainty on stock–bond–cash portfolios with short to medium term investment horizons.